Not Following an Endurance Insider

 | Jul 17, 2013 | 4:30 PM EDT
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A Form 4 filed with the Securities and Exchange Commission has disclosed that Dragon Global Holdings, a company connected to Endurance Specialty Holdings (ENH) CEO John Charman, purchased about 3,100 shares of Endurance stock on July 11 at an average price of $52.21 per share. Because of Charman's relationship to Dragon Global, this transaction had to be reported as an insider purchase.

Dragon Global now owns close to 510,000 shares of Endurance Specialty, a $2.3 billion market cap company engaged in property and casualty insurance and reinsurance. Insider purchases are often treated as bullish signals for a stock, as insiders are effectively increasing their company-specific risk rather than diversifying their wealth as would normally be expected under economic theory.

Endurance Specialty's revenue was about flat in the first quarter of 2013 from a year earlier, as the company increased the amount of net premiums written, but that was offset by a larger negative change in unearned premiums than had been recorded in the first quarter of 2012. The company did see lower net losses on the expense side however, and as a result it delivered $2.13 in earnings per share, up from $1.72 in the prior year period -- a 24% increase. Cash flow from operations was slightly lower but was generally returned to shareholders through dividends and buybacks. We'd also note that Endurance Specialty drew somewhat heavily on its cash position, on net, to purchase marketable securities.

The market is valuing Endurance Specialty at a slight discount to the book value of its equity, with a price-to-book ratio of 0.8, after the stock has risen more than 40% in the last year (therefore outperforming the S&P 500 by a considerable amount).

In earnings terms, it is tougher to call Endurance Specialty a value stock at a trailing P/E multiple of 16; we aren't sure that lower net losses (or any factor that drives profits growth through an improving net margin) are a sustainable factor which investors can rely on. Wall Street analysts project $4.73 in earnings per share for 2014, which means the current valuation comes out to 11x forward earnings estimates.

The closest peer for Endurance Specialty is ACE Limited (ACE). Possibly in part due to ACE's larger size (its market capitalization is $32 billion), investors are more confident in the safety of the company's assets, and as a result the price-to-book here is 1.1.

We could also look at the even larger American International Group (AIG). The market continues to distrust AIG, which performed so poorly during the financial crisis. AIG is priced at a discount to Endurance Specialty in terms of book, with a P/B of 0.7, and we'd note that management has been active in selling off some of the company's assets. Both of these insurance stocks trade at 11x analyst consensus for 2014, so despite the range in book valuations among these three companies, they are priced at essentially the same level in terms of forward earnings.

However, even given the insider purchase at Endurance Specialty, we aren't sure it makes a better pick than its peers. In the case of ACE Limited, the forward P/E is the result of the sell side expecting very little improvement over the trailing numbers, while Endurance Specialty is supposed to considerably increase EPS over the next year and a half.

While we wouldn't reject analyst forecasts out of hand, we generally prefer it when companies aren't dependent on improving their bottom line, and of course we'd mention that Endurance Specialty has been getting its recent earnings growth through lower net losses. In AIG's case there is a larger discount to book value than what we see at Endurance Specialty, though of course investors would have to depend on the company's numbers (and acknowledge that the markets are unlikely to value AIG fully at book in the near future).

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volatility is quite low here, and we could see some downsides here in the short term. ...



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